Some people dream of becoming a millionaire – and could. But they need to make the right steps to get there! If they had the right plan to start investing in the right way and stick with it over the long run, I reckon they could realistically aim for a million.
Three key factors to building wealth
That is possible even from a standing start. Three key things will help determine the outcome, so it is worth considering each of them in turn.
First is the timeline involved. If an investor wants to retire at 55, for example, but only starts investing at 45, they have just a decade at their disposal. Starting at 30, they would have a quarter of a century. That could give more time for their share portfolio to create value as well as a longer timeline for regular contributions.
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The second factor is how much they invest. It is a lot easier to aim for a million if you are investing £500k than £50k.
The third factor is the performance of their portfolio – does it grow by 10% a year or 5%, for example? Or does it lose value?
Here’s how a 30-year-old could aim for a million
To put that into perspective, imagine that a 30-year-old who has no investments starts drip-feeding £1,200 each month into a Stocks and Shares ISA. If they achieve a compound annual growth rate of 7.5%, the ISA will be worth over a million pounds by the time they are 55.
A compound annual growth rate can come from dividends or share price growth. Share prices can go in both directions and dividends are never guaranteed, but by choosing the right shares to buy I think a 7.5% compound annual growth rate is realistic in today’s market.
Finding shares to buy
An example of a share I own that I hope might achieve that sort of compound annual growth rate is Card Factory (LSE: CARD).
The dividend yield is currently 6.2%. On top of that, I think the current valuation looks cheap, with the share selling for eight times earnings. So I hope the share price can grow over time, as it is a profitable business with ongoing expansion plans, a proven business model, and a well-known brand.
One mistake many people make when they start investing is not taking risks seriously enough. I assessed risks when I bought my Card Factory shares. As postage prices rise, the demand for cards could fall. Lower numbers of shoppers on the high street could also be bad for sales.
Investing with a long timeframe, though, means I am thinking about where Card Factory might be a decade or two from now. With that in mind, the current share price looks low to me.
Costs can add up
There is another factor that could potentially harm a portfolio’s compound annual growth rate, especially over a 25-year timeframe: how much money gets eaten up in fees, costs, taxes, and commissions.
So a useful first step to start investing is to compare the different share-dealing accounts and Stocks and Shares ISAs available.
